What is the cost of converting universal life insurance to term life insurance?

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Asked February 10, 2011

1 Answer


Converting from a universal life insurance policy to a term life policy may not have any direct costs associated with it, but the logn term disadvantages are dramatic. By converting to a term policy, you give up the ability to borrow against your policy or take an active hand in how the premiums are invested. Term life insurance does not guarantee a payout the way that universal life insurance does, so outliving the term of the policy is likely to result in a complete loss of the funds invested. On the other hand, term life insurance is cheaper than universal life, and the conversion from universal to term coverage may pay the insurance premiums for many years, or pay off the policy completely. In this case, any monies above the cost of conversion and premiums payments is forfeit as a process of the conversion in most cases.

What is more common is to convert a term life policy into a whole life policy. Conversion costs are minimal, and converting to whole life gives you the ability to participate in the management of the policy, enjoy a tax deferred status on your insurance investment, and borrow interest free against the accrued balance over the life of the policy. When a term life policy is about to expire, you have three options to choose from: Allowing the policy to terminate, extending the policy, and converting to universal life insurance or some other form of whole life coverage. If the policy expires, you forfeit any money you've paid into the policy. Extensions to life insurance are not guaranteed, and will cost progressively more to renew as you grow older. This leaves converting to a universal whole life policy the best choice to maintain coverage and recoup the most usefulness from the premiums you pay.

Converting a term life insurance to a universal life insurance policy can make a huge impact on your financial security, but the opposite, converting whole life insurance to a term life policy, results in the loss of much of your paid premiums and has the added disadvantage of possibly terminating without a settlement when the term expires. If you are considering the switch to save money, it may be a wise decision to consider altering the final payout of your whole life insurance to negotiate lower premiums instead of dropping the policy completely.

Answered February 10, 2011 by Anonymous

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